Is China Outpacing the U.S. in AI and 5G?

Two countries continue to dominate the headlines in the races to dominate 5G wireless and artificial intelligence technology: the Untied States and China. And while that may not be a major revelation, the fact that China is making huge gains — and jumping ahead in some aspects — may come as a surprise to many investors.

Here’s what’s been happening with these two important tech segments lately, which companies are making the biggest moves, and why the U.S. could eventually wind up falling behind.

Image source: Getty Images.

China’s smart moves in AI

Though only 9% of all AI start-up deals happen in China, the total amount of equity funding going into AI in that country is now more than the amount invested in it in the U.S., according to data from CB Insights. In 2017, 48% of investment in AI start-ups went to Chinese businesses, up from just 11.6% in 2016. It was the first time AI investments in China outpaced those in the U.S.

This shift isn’t happening by accident either. China’s Ministry of Industry and Information Technology initiated a multiyear plan in 2017 to generate more than $59 billion annually from its own AI industries, and dominate the artificial intelligence market by 2025.

The strategy includes plans to mass-produce neural network processors just two years from now, use the chips to improve manufacturing, put AI into half of its new cars by 2020, and have 90% of cities and highways capable of communicating with smart cars by that same year.

Most companies — including Chinese ones — that want to buy artificial intelligence chips look to Intel and NVIDIA (NASDAQ: NVDA) right now. NVIDIA’s processors are used by the world’s largest tech companies to power everything from AI data centers and semi-autonomous cars, and the company estimates that its total addressable market in AI will grow to nearly $40 billion by 2025.

Image source: Getty Images.

China has taken notice of NVIDIA’s AI chip dominance, and has specifically named the company several times over the past few years as one it wants its homegrown players to challenge. An article in Wired last year noted that China wants to produce an AI chip that would be 20 times more efficient than NVIDIA’s 3-year-old M40 chip. While such an AI processor would be several generations behind NVIDIA’s current chips, it would still represent a big leap from where Chinese tech companies are night now. Alibaba and Baidu , China’s two biggest internet companies, still rely on NVIDIA’s chips for their AI needs.

Both the government-issued road map and the level of investment show China is serious about jumping ahead in the AI space. While U.S. companies still dominate, it’s way too early to count China out.

5G wireless standards are up for grabs

China also wants to get ahead in other tech areas like wireless, where the next frontier is 5G. The big three Chinese telecoms — China Mobile (NYSE: CHL) , China Unicom , and China Telecom — have committed to spend $180 billion over the next seven years to build the world’s largest 5G network.

China Mobile has already started its 5G push, and is conducting a five-city test of 5G wireless technology this year. Top U.S. telecoms AT&T and Verizon are conducting their own 5G tests as well, of course, but China Mobile’s early move is notable because it’s the world’s largest wireless telecom, with about 890 million customers.

But China’s 5G push doesn’t end there. China-based tech company Huawei already has 10% of essential 5G patents, and its focus on the technology has caught the eye of the U.S. government on several occasions, according to The New York Times (paywall).

A 2012 congressional report said that Huawei could use its 5G tech to spy on Americans, and most recently, President Trump signed an executive order to stop the hostile takeover bid that Broadcom (NASDAQ: AVGO) was making for Qualcomm (NASDAQ: QCOM) based on national security concerns.

The government earlier had expressed concern that if Broadcom bought Qualcomm, the merged company could cut back on its investments in wireless tech, which might result in the U.S. failing to set the standards for future 5G technology. And if Qualcomm, which is based in San Diego, isn’t setting those 5G standards, then Huawei will, which in turn was viewed as a potential problem for national security.

Image source: Getty Images.

Why all of this matters

The political land mines around technology deals are likely to get more complicated as China tries to gain more ground in tech, and as Washington becomes more skeptical of China’s intentions. This could result in further restrictions on tech company mergers and acquisitions.

As for AI, it means that those U.S. companies today making big strides in AI processors, driverless cars, etc. will likely begin to see significantly increased competition from China. That might not be all bad for investors who have added Chinese tech companies into their portfolio, but remember, those investments come with their own set of risks .

In this struggle for AI and 5G dominance, among the few things that are clear are that U.S. companies will face more intense competition and that national security fears will likely continue creeping into future deals. And investors should expect Chinese companies to move further away from relying on U.S. companies for these technologies in the coming years, and instead forge their own paths.

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Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Baidu, Nvidia, and Verizon Communications. The Motley Fool owns shares of Qualcomm. The Motley Fool recommends Broadcom Ltd and Intel. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.